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ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – EMPLOYEE VS INDEPENDENT CONTRACTOR – TO ADVISE OR NOT TO ADVISE – THAT IS THE QUESTION

By Robert S. Schriebman

2018

Introduction

During my law practice, going on 50 years, I have given many classes on the EDD and IRS aspects of worker classification. I often get calls from tax professionals concerning how to advise their clients, in various industries, how to legally and safely classify a worker as an employee or an independent contractor. Clients have asked me to draft engagement agreements that will stand up to both an IRS and EDD audit if worker status is challenged. It is never easy to give assurances.

In the many audits I have handled with the EDD, I have learned a thing or two about the importance to the EDD of a properly drafted independent contractor agreement. To my dismay and consternation it has become increasingly clear that the typical EDD auditor pays no attention to these agreements no matter how well they are written. This is why I now refuse to even attempt drafting a "bullet-proof" independent contractor agreement because I know that I can give my client no peace of mind.

The IRS is more likely to honor these agreements than the EDD. In fact, if you review the EDD's 23 guidelines for worker status, you will not see any reference to the existence of a written contract. The well-known "20-Factor" test set forth in the IRS guidelines, on the other hand, recognizes that a written agreement is one of the factors tending toward an independent contractor relationship.

It's bad enough that the EDD traditionally disregards written agreements, but recent labor code legislation provides for stiff penalties if an Enrolled Agent, CPA, or anyone for that matter, gives wrong advice on worker status. This article will take a look at Labor Code § 2753 enacted in 2011 for wrongful advice given after December 31, 2011.

Labor Code § 2753

Enforcement of a labor code violation rests with the Department of Labor. But don't kid yourself; the Department of Labor works hand-in-hand with the EDD. This section should also be read along with Labor Code § 226.8 as a violation of one section will most likely be a violation of the other. Both of these sections became effective at the beginning of 2012 and while this article is written in 2018, six years or so is a short life span for these statutes.

Labor Code § 2753 states in substance that any person who, for money or other valuable consideration, knowingly advises an employer to improperly classify workers, shall be jointly and severally liable with the employer if the worker is found not to be an independent contractor. Fortunately, these sanctions do not apply to a licensed attorney authorized to practice law in California or throughout the U.S. Yes, attorneys are off the hook, but no other professional advisors are.

Labor Code § 226.8 is a long code section imposing stiff penalties for the willful misclassification of worker status.

These code sections do not discuss whether an advisor has a reasonable basis for a position taken with respect to worker status. A good place to determine if a reasonable basis exists is to perhaps review the legislation and discussion concerning penalties assessed against tax advisors for taking improper positions relating to advise given for purposes of the preparation of federal tax returns.

It is one thing to have tough penalties on the books, but quite another to see if and how these penalties are asserted and enforced by the Department of Labor and the EDD. I have handled my share of EDD audits and as of this writing, I know of no penalties that were issued against any advisors. So, we may have stiff penalties on the books that are not honored by enforcement. However, these statutes are still young.

The Importance of EDD Settlements

If an employer is assessed for improper worker classification by the EDD, that employer has essentially three options:

  • Pay the assessment
  • Have a hearing before the CUIAB
  • Consider an EDD Settlement

In my opinion the first two options carry the risk of being assessed Department of Labor penalties for improper worker classification. The EDD audit will have resulted in the issuance of EDD penalties, but not labor code penalties. The employer has exposure if he just pays the assessment or loses a CUIAB hearing.

On the other hand, an EDD settlement is no admission of wrongdoing and does not relate back to the periods in issue. EDD settlements, therefore, minimize the risk of Department of Labor exposure.

Conclusion

The best advice I can give non-attorneys with regard to advising employers on worker status, is not to advise at all. Instead, advise your client to contact legal counsel and especially a labor lawyer representing employers.

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Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 40 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD and he is not employed by the EDD or any other agency of the State of California.

Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See "California Tax Collection Practice and Procedures" and "California Taxation Practice and Procedure," both published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, "IRS Tax Collection Procedures – A Manual for Practitioners" published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, "IRS Tax Collection Procedures – A Manual for Practitioners" published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See "California Tax Collection Practice and Procedures" and "California Taxation Practice and Procedure," both published by Commerce Clearing House.

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